Hey, it’s May – Time to Update Your Annual “Equity Inventory”

“Never send a cat to deliver cream.”
– French Proverb

ACTUAL CASE HISTORY: Over the office intercom our office manager announced a telephone call: “It’s Jacob on the line, and he sounds like he’s in a panic.” I picked up the phone and, sure enough, Jacob was in a panic, and a real panic at that. Jacob sounded like a person who just had his life savings stolen. In fact, that’s pretty much what had happened.

Jacob, 61, was a veteran of the timeshare business. As a young man he ran a chain of motels that was purchased by a large, family-owned hotel company. Over time the hotel company grew, and was bought out by one of the largest hotel companies in the world. In his middle age, he rose through the executive ranks, and was a pioneer in creating, marketing and selling resort timeshares. He was “there” when the industry went national, and “there,” again when it went international. Jacob “rode the wave” in the timeshare business, and did quite well for himself in the process.

Over the years, Jacob accumulated a large number of stock options. It had always been his idea to let the stock options increase in value over time. He’d estimated that their value had grown to over $600,000. At age 60, Jacob retired from his position as Senior Vice President – Business Development.

The day before Jacob called us, he’d called his former employer’s Corporate Treasurer’s office to arrange to exercise a few thousand options, and cash them out. An hour later, he received a call back. The return message included some very unwelcome news: according to the company’s records, most of his stock options were gone.

Jacob was incredulous, confident that someone had simply made some kind of bookkeeping error. The Treasurer’s office referred him to the Employee Benefits department. In turn, the Employee Benefits Department referred Jacob to a dispute resolution call center in Bangladesh. The operator there tried to help, but didn’t seem to understand the seriousness of the matter to Jacob, and asked him to send in a letter, which would be answered within 60 days.

Jacob returned to the office of the Corporate Treasurer, where an old friend promised to look into the matter. She found not one problem for Jacob, but two. First, the company’s Stock Option Plan had been amended three years ago. While the Stock Option Plan used to provide retirees, like Jacob, a full ten years from the date of their retirement to exercise their vested options, the amendment gave retirees only one year from retirement, or the date of the amendment, whichever was later. Unfortunately, Jacob had missed that date by some six months.

Second, “fine print” in the Stock Option Plan required those who retired as senior vice presidents and higher to provide a minimum of one full year of notice of intent to leave for any reason – including retirement – as a pre-condition to their continued ability to exercise of stock options, something that no one had told Jacob about. These two problems, taken together, resulted in the forfeiture of 87% of Jacob’s stock option value, a very big “hit” for anyone, but especially for someone already retired and counting on his pool of options to fund his retirement.

At Jacob’s request, I read all of the fine print, and did some legal research, but couldn’t find a way to help him. Jacob did all he could to call in some very old favors. He was told that a few years ago, his options could be replaced with backdated new ones, but the recent scandals regarding abuses in backdating of options now made that impossible. Nothing worked; Jacob was simply “out of options.”

LESSON TO LEARN: Based on our experience of almost 25 years in this field, tens of millions – if not hundreds of millions – of dollars in stock options, restricted stock, so-called “phantom” stock, and other kinds of employer-granted equity is probably lost each year by employees due to one form or another of their own negligence. If it wasn’t for the fact that people do these things to themselves, it ought to be made a crime.

Compensation by corporate employers generally takes the form of (a) base salary, (b) yearly bonus, and (c) long-term compensation plans. For many people, this last category grows over time to be quite substantial. For some, it comprises far and away the greatest source of their personal savings. But this last category, too, is often bound in numerous complicated and complex terms, rules and conditions, that are sometimes confusing even to those who write them.

Regardless of the level of sophistication of our clients, their level of success in the business world, or how much money is at stake, we are continually amazed at the scant understanding so many of our clients have about (a) the amount of equity they are entitled to, (b) the time periods they have to take advantage of that equity, (c) the conditions that must be observed in order to keep that equity, and (d) how easy it is to lose that equity. Can you imagine forgetting that you own a piece of real estate, or failing to tell your loved ones that you have a fully-paid life insurance policy? That’s what we’re talking about here, only with respect to employer-provided equity.

The simple lesson is this: no one else will protect you; you have got to protect yourself. It is essential that you take the steps, each year, that are necessary to ensure that your “next egg” does not end up a “goose egg.” Regarding employer-granted equity, the one step that is paramount is to create and annually update what we call an “Equity Inventory.” May is the ideal month to do so because, as you may need the assistance of your accountant and attorney to understand some of what you need to read, and its legal ramifications and tax implications, your accountant has just completed his or her “tax season,” and you attorney has not yet gone off to his or her summer vacation or country home. And, too, Human Resources representatives are still likely to be around town.

WHAT YOU CAN DO: It is essential that you take these seven (7) simple steps to create an equity inventory and protect your rights to the employer-granted equity (whether from your present or former employers) you have earned over the years of working for corporate employers:

1. Assemble All Materials You Have or Have Access To: The first step in creating your Equity Inventory is to determine what, if any, materials you presently have, or have available to you. These would include such things as (a) award statements, sometimes called grant letters, that say, in effect, “Congratulations, for your service during the past year you have been awarded 100 (or, maybe 1 million) stock options.” These would also include copies of relevant equity “plans,” amendments to those plans, names and addresses of colleagues and former colleagues who may also have received equity grants when you did, and addresses of websites and intranet sites that may provide relevant information and documentation.

2. Prepare a Draft Equity Inventory: The next step is to prepare a careful draft inventory of what equity you have, and what strings are attached to each type and grant. As examples, grant letters and stock option plans may provide that vesting takes place only while you are employed; alternatively, they may also permit vesting to continue during periods of disability and during retirement. Frequently, all vesting is stopped if you go to work for a competitor to your employer. While restricted stock may lose its restrictions if you are laid off, in that event new restrictions may also arise. For each grant of equity from your employer, write down all information you are able to locate. Below is a simple “Sample Equity Inventory Form” you might use as a basis for your efforts.

If you would like to obtain a “model” Equity and Benefit Inventory
for your own use in keeping track of what your interests are [click here].

3. Confirm Your Equity Inventory: This third step is probably going to be your most frustrating, and time-consuming, step in the process, but it is also your most important. Request that your employers (present and past) provide you with what their records show you are due. Such requests should be made in writing, should be sent to the Corporate Treasurer and the Corporate HR Director, and should include a request that your inquiry be forwarded to the right person. It wouldn’t be a bad idea to “cc” the CEO.

Be prepared to be persistent and assertive. Comparing your own draft inventory to their records is the most direct route to creating a “base-line” understanding of whether you and your employer (or former employer(s) agree, or differ, on your entitlements to equity. (Alternatively, you might consider sending your own draft Equity Inventory, and request written confirmation of its accuracy.) If you and your employer (present or past) differ as to any issue of equity, the earlier you know about it, the better.

4. Request Copies of All Future Amendments: Employer equity plans may be modified, or even terminated, without your notice, knowledge or agreement. Nearly every compensation plan document includes, in its last few pages, something like “This Plan may be modified or terminated at any time, with or without notice, at the discretion of the Plan trustees, administrators or directors.” Once you come to a clear understanding of your employer-granted equity, and all of its terms and conditions for vesting, exercise, sale, transfer, forfeiture, to name a few, you’ll need to update your Equity Inventory if, as and when those terms, conditions, etc., change. To do so, we recommend you send a written request to your employer’s (or former employer’s)Treasurer or HR Director that they mail you a copy of any and every future notice, amendment, or other change that affects you and your equity.

5. Reconfirm Each May: Once you’ve created your Employer-Granted Equity Inventory, we suggest you contact your employers and former employers each May to reconfirm that your Equity Inventory remains accurate.

6. Always Be “Digital” in These Matters: We strongly recommend you use email to the greatest extent possible in these matters, for email is a convenient, lasting, economical, accurate and easily confirmed communication method. In a world where “I don’t recall” and “We have no record of that” can so easily trip up efforts to achieve basic fairness, always “let your fingers do the walking and talking.”

7. Store an Updated Copy with Your Will, Life Insurance Policies, and Important Papers: Once you have created an accurate, comprehensive listing of what stock, stock options, restricted stock, phantom stock, and any other kind of long term incentive you were awarded by your employers, past and present, store it in a safe place. Make sure your spouse, partner, executor or next of kin knows where it is kept, and how valuable it may be. Your employer-granted equity took years to earn, and may represent financial security to those you care about for years to come. On the other hand, if not safeguarded, it may end up simply lost, forever, without a trace, for no good reason.

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